September Review

Portfolio Update
After Our Man’s comments a couple of months ago on the lack of portfolio activity, it goes without saying that September saw yet more activity!  The following change was made during the course of the month:

- Treasury Bonds: With the volatility in the markets lasting into September, there continued to be  a move towards “safe” assets during the month.  Once more, US Treasury bonds proved to be a “safe asset” in the eyes of investors, and as a result of being and largely under-owned and speculation that the Fed may enact “Operation Twist” (and thus become a buyer of long-end Treasury bonds) we saw further falls in Treasury Yields (and rise Treasury bond prices!).  This move was exaggerated when the Fed initiated “Operation Twist” (essentially buying longer-term Treasuries, and selling some of their shorter duration debt) at a larger size than the market expected.  While Our Man still thinks yields at the long-end of the curve could fall further and find new lows, the risk-reward became substantially less attractive after the Fed’s intervention (and the subsequent sharp decline in yields) and Our Man exited the majority of the Treasury Bond positions (specifically, the TBT puts and ½ the TLT position).

Performance Review
As regular readers will know, Our Man hasn’t exactly been a buyer of the markets in recent times (and has almost zero faith in QE to improve the economy in any sustainable way), and thus the portfolio has very controlled exposure.  Given this and the sharp decline in Treasury yields (described above), September proved to be another good month for the portfolio, +4.5% for the month (YTD: +8.7%). 

Unsurprisingly, September’s performance was again predominantly driven by the Treasury Bond book (+372bps) which benefited from the continued “flight to quality” and resultant collapse in Treasury yields.  The Bond Funds (-7ps), also benefited from this fall in US Treasury Bond yields but the gains were offset by their exposure to (non-Treasury) credit and precious metals.

The Equity books largely suffered throughout the month, as their small/micro-cap bias meant that these ‘riskier’ stocks were largely discarded by investors in the ‘flight to quality’.  The NCAV (-40bps) book was the most severely impacted, falling almost 20%, as the stocks within it are largely micro-cap and barely profitable; thus amongst the most risky types of investment out there.   While the Value Equities (-43bps) book fell in-line with the market, this disguises the weak performance of DRWI (which cost almost 60bps).  While they key components DRWI’s fundamental story is unchanged, the stock fell heavily due to its small-size, lack of profitability and concern as to whether it would reach its break-even goals in early-2012.  While last month’s addition to the position is longer-term in intent, it’s worth noting that the stock now trades noticeably below the price at which Our Man added!  The Other Equities (-13bps) and Energy Efficiency (-1bp) book performed broadly in-line with the markets.  Against this negative performance, the Puts/Hedges book (+71bps) performed well, with a number of the put positions now being at or close to the money.  Once more the XIV investment was a negative contributor to the Puts/Hedges book; now that Our Man has held the position >30days, expect it to be sold in the coming months!

The Short China book (+48bps) was a strong contributor during the month, as uncertainty over a global slowdown and concerns over a potential China hard-landing saw copper prices (and related equities) fall during the month.  This puts the book into positive territory for the year (and indeed means it is flat since its inception), the probability remains that Our Man will likely add to the book and position it more aggressively for 2012 on any significant rally.

The Currencies book (+62bps, also putting it in positive territory for 2011) was the other strong contributor during September, as the Euro fell following continued concerns over Greece’s debt and contagion both to other sovereigns (especially Spain and Italy) as well as the regions Banks.  While there are a number of rumors of potential fixes to the sovereign debt issues, so far none seem to offer real solutions as they largely propose increasing debt (or adding leverage to the vehicle to buyout troubled countries debt).

The changes to the portfolio over August and September have resulted in the bearish tilt slowly being reduced, and a substantial increase in Our Man’s cash horde!  It would only be fair to explain to you, what he’s anticipating in the markets and how he intends to spend it…but that’s the topic of a future blog post!

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate)
14.4% - Bond Funds (DLTNX and HSTRX)
9.2% - Treasury Bonds (TLT)
4.7% - Value Idea Equities (THRX, and DRWI)
2.2% - Other Equities (NWS, CMTL and SOAP)
1.8% - NCAV Equities
0.3% - Energy Efficiency (AXPW)

-1.8% - China-Related Thesis (58bps premium in FCX put)
-6.2% - Hedges/Put Options (55bps premium in S&P Dec-11 puts, 70bps in IWM Jan-12 puts, and 62bps SLV Jan-12 puts, all offset by a position in XIV)

-9.6% - Currencies (EUO – Short Euro)

59.2% - Cash



Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, TBT puts, DLTNX, HSTRX, THRX, DRWI, NWS, CMTL, SOAP, AXPW, FCX puts, SPY puts, IWM puts, SLV puts, XIV and EUO).  He also holds some cash.